Definition: Break-even pricing is an accounting pricing methodology in which the price point at which a product will earn zero profit is calculated. In other words, it is the point at which cost is equal to revenue.
Description: Break-even pricing is a common tool used by most companies to set the pricing strategy of their portfolio of products. It is computed by the management of a company to make informed decisions in case it wants to increase the production or put a check on costs. The company can choose to set a price which is below the break-even point. But, in that case, the company would be earning revenues and would not be making any profits. So, the main motive of the company would be to increase its market share rather than earning profits. Most of the e-commerce firms are still operating below their break-even point. But, they have been able to tap the market share. This pricing methodology helps the company in setting up the lowest acceptable price. Break-even price is calculated by using this formula = (Total fixed cost/Production unit volume) + Variable Cost per unit. Let's understand with the help of an example. XYZ Ltd is into manufacturing of light bulbs. The fixed cost of manufacturing bulbs turns out to be Rs 50,000 and the variable cost per unit is Rs 10. The company sets an annual target of selling close to 10,000 bulbs. The break-even pricing can be calculated by using fixed cost as well as the target for annual sales. Break-even point = (50,000/10,000)+10 = Rs 15 The break-even price for one bulb is Rs 15, which means that the company can choose to price the product above this price to earn profits. If it chooses to price its product below Rs 15, it would not be earning any profits.
